Columns » The State of the State by Jeremy Alford

Oil Bust

If state officials are hoping for an old-fashioned oil-and-gas rebound in the near future, they're drilling nothing but dry holes.

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While most oilmen kept their distance from the state's oil and gas lease sale in early March, Everard Marks happily put down $94,000 for acreage in Plaquemines Parish. It turned out his company, the Metairie-based Martin-Marks Minerals, was one of only six active bidders during the sale.

  It's feeble compared to the hot and heavy action of last summer, when the natural gas run in the Haynesville Shale area made instant millionaires out of landowners in north Louisiana. "We don't chase the resource plays around like that. We don't chase trends," Marks says. "That's why we're still buying leases when no one else is. We still have capital, and the rate of return is still good enough to keep us interested."

  Marks is one of the exceptions. The state Mineral Board's monthly collections have been in a slow decline. In December, producers cashed in on only $1.4 million worth of leases, the lowest year-end sale since 2004.

  The following month saw $881,000 in leases, the weakest January sale on record for at least the past 13 years. February's sale boasted a modest increase above last February's collections, but that wasn't much when you consider the average February sale from 2003 to 2007 was $4.6 million.

  March sales, as expected, didn't buck the trend. Producers forked over $1.3 million to search the state's energy leases, which was the bleakest March total since 2003. Adding to the misery are the state's offshore leases, which have sat dormant since January and have been underperforming for a year or better. According to the Houston-based Baker Hughes Inc., a respected reporting agency, Louisiana lost three active rigs in March.

  When will things turn around? That depends on whom you ask. Predictions range from six months to nearly two years. Reserves are brimming and the passage of time will certainly help deplete them. Based on some estimates, about 80 million barrels of oil are just floating around on the high seas in supertankers waiting for a place to unload.

  To put that figure into perspective, the world consumes around 84 million barrels each day. "It's inevitable," says Don Briggs, president of the Louisiana Oil and Gas Association. "Depletion will absorb that surplus and we'll have a tight market again. There's no question that it will eventually turn around."

  The economy, of course, is also keeping oilmen away from the state's sales of leases, says Robert A. Schroeder of Mandeville, who represents other producers in front of the Mineral Board. Oil prices closed at a record high of $145 a barrel last July but are now around $50, fluctuating slightly day to day.

  Couple that dismal figure with the lack of investment capital and credit, and it's no wonder exploration activities are being scrapped or tabled in 2009. "The ability to repay loans and the return on investments are keeping a lot of people at bay. You just can't do much in those conditions," says Schroeder. "Almost all of my clients are taking a wait-and-see approach and they're only spending money to keep up the leases that they already have."

  Maybe if action picks up on the federal level the excitement will trickle down. Well, that's wishful thinking. A federal lease sale of acreage in the central Gulf of Mexico brought in only $703 million two weeks ago ­— a figure dwarfed by the $3.7 billion pulled in last year. In particular, the area known as 181 South, from which Louisiana gets a piece of the sales, drew only 13 offers amounting to $6.5 million.

  As for what Louisiana officials have planned in the hope of resurrecting what is normally the state's economic life preserver, look no further than the annual legislative session, which convenes April 27. Lawmakers contend that an assortment of tax credits and incentives will be introduced, but only a few are actually in the hopper right now. Surprisingly, those limited few are also tied to green initiatives (tax credits for compressed natural gas and CO2 programs).

  Marks says any kind of tax break would help. He says his company has already benefited from a number of new incentives, like one promoting drilling in previously abandoned wells.

  But until help arrives, Marks says his wells will be pinched back to 50 percent and he won't be borrowing money. The oilman says he has stayed far away from debt, and that's one of the reasons he's still investing in a market that's scaring others away.

  "For me, this business has nothing to do with being smart," Marks says. "It has more to do with being chicken."

Jeremy Alford can be reached at jeremy@jeremyalford.com.

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